In May, the Reserve Bank lowered the official cash rate to a record low of 1.5%. They signalled a possible further drop to 1.25% and an expectation that the inflation target point will increase to 2%. Over the past 10 years inflation has averaged approx. 1.5%
The current average 6-12-month term deposit rate is approximately 3.20%. After accounting for tax and inflation the resulting net real return is close to 0%. This means the relative buying power of your money is decreasing.
Cash and term deposits are generally low risk and lower return investments. There are alternative investment options that are also low risk but are diversified to achieve higher expected returns.
The graph below illustrates how investing in a diversified portfolio of assets (bonds, cash, shares) can offer a higher potential return and protection against inflation. The conservative portfolio of 20% shares and 80% cash / fixed interest has about double the expected net return compared to a current term deposit.
We are happy to discuss the benefits and risks of a diversified investment approach.
If you want to be confident that financial investment decisions will provide you with the greatest probability of achieving the retirement you aspire to, talk to us. We will help you establish a strong and secure investment foundation that delivers what you want and can understand.
This information is general based on our model Portfolios at the 28 cents tax rate. A disclosure statement is available on request.